System Domain 1: Neoliberalism

 

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Brief disclaimer: this system description covers neoliberalism policy as it has been practiced in recent history in developing economies. Neoliberalist policy can be effective in developing economies the same way that communism can be effective: not in practice/not as we know it.

Neoliberalism (aliases: Washington Consensus, structural adjustment) is a policy that has dominated the world of development since the 1970s. It started after World War II, with the emergence of 1) the United Nations as a governing body, concerned about the matters of the world over the matters of individual countries, however led specifically by the “winners” of World War II, primarily UK/Europe and United States, and 2) Keynesian economics, which pushed the belief that an open market, above all else, is the key to economic success. These two elements together created a connection to neoliberalist policy in developing (formerly known as Third World) countries, initially with the purpose of increasing economic development in these countries.

However, this policy didn’t create its expected outputs. Instead, the resulting element of neoliberalist policy and fragile markets opened to the global economy was the inability of these markets to compete against foreign goods.

For the sake of conceptualization: The United States, as a developed country and UN leader, was never forced to remove tariffs/subsidies for the sake of economic development. As a result, the country had (and still has) many agricultural subsidies, causing very low cost of production of corn. In the NAFTA agreement, Mexico was forced to open its markets to the United States and Canada. However, Mexico does not have the strong subsidies as the United States. The United States then dumped all of its extraneous, subsidized corn onto Mexico’s market (as recently as the late-2000s), making it extremely difficult for Mexican corn to compete, despite its cultural importance. As a result of these policies, Mexico’s economy has suffered. Besides the lost direct economic production lost from the corn market, tax revenues dropped, and Mexico continued to be unable to protect its now nearly-nonexistent corn market. Additionally, if the United States had a spike in corn consumption, Mexico would be unable to make up the difference with its own weak market, causing shortages in corn, an important staple to Mexico’s diet.

This example of the relationship between Mexico and the United States represents the negative outcomes of neoliberalist policy as enforced upon developing countries. However, this is not simply a cause-and-effect system. You might expect that, upon discovering the negative outcomes of neoliberalist policy, the United Nations and developed countries would stop enforcing it. It didn’t.

As development policy as a whole was only just beginning with the implementation of neoliberalist policy, there was little information about the importance of monitoring the interconnection between policy and its effects. It was assumed that a well-thought-out policy would always work, so drops in a country’s economic performance were a result of other interconnections linking to performance. As a result, a reinforcing feedback loop emerged. The more neoliberalism increased, the worse countries performed (albeit slow-moving enough to not be linked to a specific policy unless directly monitored), then the more neoliberalist policies emerged to prevent slow economic performance. The false interconnection between neoliberalist policy and economic development allowed this feedback loop to continue despite the fact that the interconnection was actually negative.

That delay theoretically should have lasted about 10 years before the United Nations (now guided by the International Monetary Fund and World Bank in terms of development policy) figured out that this false interconnection. So why didn’t they stop using it when they found out?

  1. An important discovery: while neoliberalist policy didn’t help out developing countries, it sure did help the developed countries giving out loans to the countries.
  2. An even more important historical development: The lag between the inception of neoliberalist policy and the realization of its true effects meant that the Cold War was hitting peak intensity at about the same time of discovery.

The Cold War was truly an ideological war of communism vs. democracy and, tangentially, socialism vs. capitalism. It was imperative that the capitalist model of development dominated the socialist model of development to secure an ideological win for “First World” countries over “Second World” countries. There was no way that the IMF/World Bank would admit a loss before the war even truly broke out. In addition, there were economic benefits flowing in for First World countries that created the problematic loans enforcing neoliberalist policy (structural adjustment). Failing markets in Africa were an easy hit to take in the name of ideological war.

Back to brief disclosure: this didn’t always happen. A couple countries in Southeast Asia, as well as Argentina, successfully developed under neoliberalist policy. However, nearly the entirety of Africa and most other countries forced into neoliberalist policy saw a worsening of economic, developmental, and environmental performance.

The purpose of the system shifted: every world decision made by the United Nations, IMF, and World Bank was thrown under the name of a “free world.” As a result, the elements of neoliberalism as an ideology and the economic benefits of neoliberalist loans caused a new feedback loop. The more neoliberalism grew as a policy, the more the ideological and economic benefits outweighed the costs.

Despite the change in purpose, the system of neoliberalist developmental policy continued to feed into itself, with little to no to negative development in many countries.

Neoliberalist policy is clearly still a recent problem, despite the end of the Cold War. Part of that is due to the polarization of the Cold War, which created a pervasive belief in the Western world that all that is capitalism is good. Another part is that the IMF and World Bank, for a long time, continued their purpose of serving developed countries over developing countries, attempting to enforce problematic loans instead of reversing the system of structural adjustment. As a result, enough interconnections in the feedback loops which initially increased the use of neoliberalism exist to allow its continuity.

Those interconnections have just begun to break in the past 5-10 years. The IMF and World Bank have been attempting to rebrand their policies and missions, while many developing countries have been pushing back against neoliberalist policies. However, the elements that the policies created for so many years are still strong, despite the interconnections in the system breaking down. It’s safe to say that the last 40 years of development policy were “lost” years that we are only just beginning to mend.

 

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